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Reforming the Federal Reserve’s Bailout Authority

On September 16th, Americans for Financial Reform (AFR) joined Senators Elizabeth Warren (D-MA) and David Vitter (R-LA) for an event at the Cato Institute about reforming the Federal Reserve’s bailout authority. The discussion focused on the Federal Reserve’s unprecedented use of its Section 13(3) emergency assistance authority to provide trillions of dollars in low-interest loans to Wall Street banks during the crisis, as well as the new limits put on that authority in the Dodd-Frank Act.

The first panel, moderated by Ylan Mui of the Washington Post, featured AFR’s policy director Marcus Stanley, and Phillip Swagel of the University of Maryland.

During the panel, Stanley argued that the Federal Reserve’s proposed implementation of the Dodd-Frank limitations was seriously inadequate, and essentially preserved its ability to give almost unlimited emergency assistance to major Wall Street banks. This point had been highlighted previously in a comment letter that AFR submitted to the Fed on their proposed rule. Both Stanley and Calabria agreed that such broad emergency assistance authority created the potential for harmful moral hazard, and that the level of emergency assistance given during the crisis had many negative effects – a point supported by extensive academic research.

In contrast, Phillip Swagel, who had worked at the Treasury Department during the crisis, argued that emergency lending authorities should be preserved and that legislative proposals to reform emergency lending authority would deprive the Federal Reserve of too much discretion.

Then, the Cato Institute’s Mark Calabria moderated a discussion between Senators Warren and Vitter about the Fed’s 13(3) emergency lending authority. They also discussed Warren and Vitter’s bill, the Bailout Prevention Act, which would address inappropriate megabank bailouts during a financial crisis by properly limiting the Federal Reserve’s lending authority. Senator Warren dismissed arguments that it was impractical to require the Federal Reserve to limit their emergency lending to solvent firms, stating that it was incumbent on the major regulator of the financial sector to understand which of the firms they regulated were actually solvent and experiencing a short-term liquidity problem, vs. actually being insolvent.

This blog is maintained by AFR as a forum for ongoing news and commentary about the fight for effective financial reform. Blog posts represent the opinions of their authors / posters, and do not necessarily represent the views of the AFR coalition or coalition members.